The function of an NFT is based on underlying smart contracts and are central to the functioning of NFTs. Basically, a smart contract is the foundation of all NFT collections.
Smart contracts are a type of Ethereum account.
The different types of smart contracts are basically pieces of software code that exist with the blockchain and allow the network to store information in a transparent and unchangeable way. Smart contracts are like a series of statements written as code on the blockchain. This information can be accessed at anytime.
These software codes are what control NFTs.
In other words, NFTs are run by smart contracts which govern the actions of verifying the ownership of non fungible tokens and transferring an NFT to another blockchain wallet.
When an NFT is transferred you need 2 pieces of information, the address of the smart contract and the ID of the NFT.
The different types of smart contracts also ensure that non fungible tokens cannot be divided into smaller sellable units, ensure they are unique and non-replicable. The rarity and scarcity of an NFT is what drives its value.
Different types of smart contracts can also trace the unique history of the NFT, who created it initially, who owned it, when it was sold and for how much. That information is publically available on the blockchain.
When you buy an NFT, a unique token is issued with the information and the details of the NFT smart contract. This information gets registered on the blockchain, is public and includes the record of purchase and proof of ownership.
The owner of the NFT can then choose to sell it. If it sells, the transfer of the NFT is authorized on the blockchain through the personal blockchain wallet key of the owner.
It is when you are minting an NFT, in other words, creating an NFT, that you are writing the underlying NFT smart contract for that NFT. There are many standards that have been established for different types of smart contracts but Ethereum is one of the first decentralized blockchain platform to use standards.
The standards in Ethereum are the ERC 1155 Standard and the ERC 721 Standard.
ERC 721 Standard is an open standard that describes how to build NFTs on the Ethereum blockchain. ERC 721 is unique and defines the workings of an NFT smart contract. A single ERC721 has the ability to manage multiple non fungible tokens.
The ERC 1155 standard is a multi-token standard that allows each token ID to represent its own configurable token type with its own metadata attributes and supply.
Different types of smart contracts also cover the rights that are being sold with the NFT. Most people assume that if you own the NFT, you own the copyright to it but you don’t. Owning an NFT is not the same as owning the copyright rights.
The copyright stays with the creator of the NFT unless explicitly underlined otherwise in the NFT license. The NFT license outlines the rights given to the buyer. The NFT license is separate from the art of an NFT. The art can be a photograph, music, a graphic, a video, etc… but the NFT license lists the rights transferred upon the sale of the NFT.
In most cases, the NFT license gives the buyer permission to display the NFT art among other things, but these terms can vary for each NFT and are coded into the NFT smart contract.
When you purchase an NFT, you are not buying the linked intellectual property. You are only buying a link to it. The content it comes with may not be hosted on the blockchain but on a traditional online hosting solution.
Smart contracts cannot link to any individual. The metadata and history of an NFT don’t enable you to link that information to a real person. It is the platforms that list and sell non fungible tokens as Opensea.io that verify the identities of the NFT creators and it is usually a manual process.
It is important to know that creating an NFT smart contract for free can’t be done, there are fees you will have to pay.
You will often come across the term “smart contract address” and it refers to the address where the NFT smart contract is deployed on Ethereum.
You can check an NFT smart contract on Etherscan.
You can find the NFT smart contract address on Opensea by simply clicking on the NFT and clicking on the “contract address” under “details”. When you do, you will be redirected to Etherscan. Etherscan is a tool for navigating through all the public information on the Ethereum blockchain.
Smart contracts can eliminate the need for middlemen such as lawyers and notaries or third party intermediaries and saves the time and resources usually needed on manually processing, transporting and exchanging paper documents. Not only do they define the rules of an agreement like a normal contract, they also execute the rules of the NFT smart contract too. So if an NFT comes with a 10% royalty fee paid to the creator, the smart contract will automatically pay the creator his 10% royalty fee.
No doubt, the different types of smart contracts are a faster, cheaper, and more secure way of executing and managing agreements.
This means that many costly and inefficient business paperwork processes can be automated, limiting the chances of human error and greatly reducing the cost and time involved of doing business.
These benefits have applications across nearly every industry when it comes to improving the speed and security of record-keeping.
At the moment, the input parameters and the execution steps for an NFT smart contract need to be specific. In other words, the parameters are very basic, they are if “x” occurs, then execute “y”. So currently, the tasks permed by smart contracts are simple, such as moving one cryptocurrency amount from a blockchain wallet to another, or transferring the ownership of an NFT from one blockchain wallet to another.
However as time goes by and with the wider adoption of Cryptocurrencies and NFTs, and as more and more assets are tokenized, smart contracts will be able to perform much more complex tasks and manage much more sophisticated transactions.
To conclude, it is through an NFT smart contract that you verify the ownership of an NFT, manage transfers of digital assets, link the NFT to another digital asset, or allocate automatic royalty payments from sales.